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Summary of Conference Report on H.R. 4173

The following outline provides a brief description of most of the key points in the Conference Report on H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was passed by the U.S. House of Representatives on a vote of 237-192, and the Senate on a vote of 60-39. All seven members of the Oklahoma delegation voted “NAY” on final passage, as the OBA had requested.

This summary is not intended as a complete review of the legislation, but we will be able to post more information and timetables on our Web site shortly. It is arranged in the order of the questions we've been fielding about it rather than on a title-by-title basis. The more detailed information we'll be posting on the Web site and will track with the bill's sections.

If you have questions, please get in touch with Roger Beverage at the OBA (roger@oba.com), 405-424-5252. Also, you can download the following in printable .pdf form by clicking here!

1. Deposit Insurance [Title 3]

a. Assessment Base: Premiums for FDIC insurance will be based on average total assets minus tangible equity capital. [Title 3, Section 331]

b. Deposit Cap: The insurance limit on deposits is permanently increased to $250,000. [Title 3, Section 335]

c. Interest-bearing Transaction Accounts: The ban on paying interest on non-interest bearing transaction (personal or business checking) accounts is lifted, with an effective date of one (1) year after the bill becomes effective. [Title 6, Section 627]

d. Deposit Insurance Fund Reserve Ratio: The minimum reserve ratio of the Deposit Insurance Fund (DIF) is increased from 1.15 to 1.35 percent of insured deposits. The difference will be covered by premiums paid by insured institutions with total consolidated assets over $10 billion until the new reserve ratio is met. The FDIC may take into consideration potential risk factors, such as the size of the institution, in determining whether to increase the reserve ratio. [Title 3, Section 334]

e. Establishment of Office of Women and Minorities: An Office of Minority and Women is created for each bank regulatory agency, including the FDIC. It will be responsible for all matters of the agency relating to diversity management, employment and business activities. It will develop standards for equal employment opportunity and workforce diversity, and develop standards for assessing the diversity policies and practices of the entities (banks) regulated by each regulatory agency. We're not quite sure how far the reach of this new department will be, but wanted you to be aware of it. [Title 3, Section 342]

2. Too-Big-to-Fail [Titles 1, 2, 11]

a. Emergency Loans: The Federal Reserve retains the ability to make emergency loans for liquidity purposes, subject to the review and approval of the Treasury Department. No loans may be made to insolvent companies and collateral for all authorized loans must be sufficient to protect taxpayers from any losses. [Title 11, Section 1101]

b. Disclosure: The Fed is also subject to significant disclosure requirements regarding the exercise of its emergency lending powers and discount window lending activities as well as open market transactions. [Title 11, Section 11.1.2]

c. Limits on Consolidation Through Merger or Acquisition: No bank, thrift, holding company, non-bank financial company supervised by the Fed or any foreign bank or company treated as a BHC may merge or acquire the assets of another company if the result would mean that total consolidated liabilities exceed 10 percent of all liabilities held by all financial companies. The total would be determined by liabilities held at the end of the year before the transaction was to take place. The bill also prohibits interstate mergers of insured depository institutions if the result would mean that the acquiring institution holds more than 10 percent of U.S. deposits. [Title 6, Section 622]

d. Enhanced Powers: Regulators now have additional powers to seize and wind down an institution or supervised company if it faces an impending failure and poses a risk to the financial system. Upon exercise of the resolution powers over the institution or company, shareholders may be wiped out, bank executives may be fired, creditor claims may be fully or partially satisfied or disallowed, and the government may thereafter assess the entire financial services industry (i.e., traditional community banks) to recoup any costs, including administrative costs incurred. [Title 2, Section 201, et seq.]

e. Dissolution Fund: Large financial companies, including bank holding companies with $50 billion or more in assets, non-bank financial services companies brought under supervision by the Federal Reserve and other financial services companies with consolidated assets of at least $50 billion will be assessed to fund any gap in the liquidation fund after the fact. [Title 2, Section 211]

f. Receivership: FDIC has the authority to appoint itself as a receiver of an insured depository institution that defaults on a guarantee received as a result of its participation in an FDIC debt guarantee program. Once it is appointed as a receiver, the FDIC may use its systemic risk authority to take necessary action or provide assistance to the institution in order to wind down the affairs of the institution. The rules that allow the FDIC to determine which debtors get paid what is unchanged. [Title 2, Section 201 et seq.]

g. Systemic Risk Regulator: A Financial Stability Oversight Council is created with the purpose of monitoring the financial system and identifying risks to the nation's financial stability because of the possible failure of any systemically significant financial services company and its operation. The council may recommend to financial regulatory agencies that they adopt heightened prudential standards for any entity that's subject to its supervision. Such recommendations include stricter rules for risk-based capital, leverage and liquidity, contingent capital requirements, resolution plans, credit exposure reports, concentration limits and overall risk management. [Title 1, Section 101 et seq.]

1. The Council is to be chaired by the Secretary of the Treasury, and includes nine additional federal financial regulators and an independent member appointed by the president and confirmed by the Senate representing the insurance industry.

2. The nine financial regulators are the comptroller of the currency and the chairs of the following federal agencies: Federal Reserve Board, Securities Exchange Commission, Commodities Futures Trading Commission, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration and the new Consumer Financial Protection Bureau.

3. The Council will meet at least quarterly and provide a systemic risk report to and testimony before Congress annually.

4. With a two-thirds vote, the council can require a non-bank financial company to submit to Fed supervision if that company's failure or distress poses a risk to the financial stability of the United States.

5. The Council has the responsibility to identify systemically important market utilities and payment clearing and settlement activities.

6. The Council has authority to review and provide comment regarding existing or proposed accounting standards, principals and procedures adopted by the Financial Accounting Standards Board (FASB) or any other accounting standard-setting body.

7. Office of Financial Research: The Office of Financial Research is created within the Treasury Department, which includes a data center and research and analysis center. Its mission is to prepare and publish reference databases of financial companies and financial instruments, including metrics and reporting systems, for the purpose of identifying, monitoring, investigating and reporting on any changes in system-wide financial stability risks and patterns. These analyses will also include reporting on stress tests and other stability-related evaluations of financial institutions.
[Title 1]

h. Increased Standards and Reporting/Disclosure: The Fed must establish enhanced prudential standards and reporting and disclosure requirements for bank holding companies with total assets of $50 billion or more and non-bank financial companies subject to Federal Reserve supervision. Such entities will be required to adopt a resolution plan if the entity were to “fail”. The entity will also have to issue credit exposure reports and participate in annual stress testing. The Council has the ability to impose a leverage ratio “cap” of 14 – 1 and the entity will be required to include off-balance sheet activities in the composition of required capital ratios. Minimum contingent capital standards must include convertible long-term debt.

i. Risk Committees and Stress Tests: Publicly-traded bank holding companies in excess of $10 billion are required to establish and maintain risk committees to supervise risk management on an enterprise-wide basis. Smaller holding companies (under $10 billion) may also be required to establish such committees in the discretion of the Fed. Annual stress tests for bank holding companies and supervised non-bank financial companies are required. Semi-annual stress tests must be administered internally.

3. Capital Requirements [Title 6, Section 617 et seq.]

a. Counter Cyclical Standards: The Federal Reserve must adopt regulations for bank holding companies requiring them to increase capital during periods of economic expansion and permit them to decrease capital requirements during periods of economic contraction.

b. Source of Strength: Bank holding companies must continue to serve as a source of strength for their depository institution subsidiaries. Further, the legislation establishes that the current capital standards constitute the minimum capital requirements for bank holding companies. They may not be lowered.

c. Trust Preferred Securities: Bank holding companies with total assets of less than $15 billion may continue to hold existing trust preferred securities as a part of the company's Tier 1 capital. Bank holding companies with total assets of more than $15 billion are required to phase out any existing trust preferred securities from Tier 1 capital over a three year period that begins January 1, 2013.

4. Consumer Financial Protection Bureau (CFPB): [Title 10]

a. It will have an independent director appointed by the President and confirmed by the Senate. The Bureau (CFPB) will be housed in the Federal Reserve, but the Fed will have no oversight or authority over its actions.

b. The CFPB has rule-making authority to promulgate and adopt rules and regulations that govern all consumer financial products and services offered by banks, credit unions and other non-bank lenders, including payday lenders and cash advance services. These rules and regulations are intended to prohibit “unfair, deceptive or abusive” acts or practices in the offering or furnishing of any consumer financial product or service. (emphasis added). There is no definition of the new term “abusive.”

c. Several new offices are created within the CFPB, including:

1. Office of Fair Lending and Equal Opportunity;

2. Office of Financial Education;

3. Office of Service Member Affairs; and

4. Office of Financial Protection for Older Americans.

5. In addition, a consumer advisory board is created and will meet at least twice a year. It consists of representatives from the areas of consumer protection, financial services, community development, fair lending, civil rights and underserved communities.

d. Examination and Enforcement: The CFPB will examine and enforce regulations upon banks and credit unions with assets of over $10 billion. It also has examination and enforcement authority over non-bank lenders (mortgage lenders, servicers, mortgage brokers, and foreclosure consultants, student loan providers, payday lenders, debt collectors and consumer reporting agencies). [Title 10, Section 1012 et seq.]

1. Banks with assets of $10 billion or less will be examined for consumer complaints by the appropriate prudential regulator.

2. The CFPB may accompany the regulator during a bank exam of a smaller institution on a “sampling basis.”

3. The CFPB has authority to review examination documents and materials, require reports of banks of all sizes as necessary to support its role in regulating consumer financial products and services and recommend action to the prudential regulator if there is found a “material” violation of federal consumer financial law.

4. The CFPB has authority to prevent or limit the enforceability of pre-dispute arbitration agreements to resolve disputes under the consumer federal laws established by this Act if it finds that such action would be in the public interest and will protect consumers. A study of pre-dispute arbitration agreements is also directed by the legislation.

e. Exemptions: Auto dealers and most retailers, merchants, real estate brokers and agents, manufactured home and modular home retailers, accountants and tax preparers, farm credit banks and attorneys are all exempt for the CFPB's provisions. So too are entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission. The Bureau will have no authority over licensed real estate brokers or real estate agents if they are acting solely in their traditional role of “brokering” a real estate transaction. They can be brought under its aura if they engage in any kind of financing of the transaction apparently. [Title 10, Section 1027]

f. FDIC Board/OTS Charter: CFPB will now have a permanent seat on the FDIC board in lieu of the OTS, which will be dissolved (although the thrift charter is preserved and the thrift institutions will be supervised by the OCC).

g. State Attorneys General: State AG's now have the authority to bring enforcement actions against a bank or other financial entity for violations of federal consumer laws and rules.

h. Pre-emption of State Consumer Financial Laws: The existing standard is modified to permit a court or the OCC (on a case-by-case basis) to preempt a state law when a finding is made that the state law “prevents or significantly interferes” with the business of banking.

5. Interchange: [Title 10, Section 1024 et seq.] The Federal Reserve is given specific rule-making authority to limit the amount of an interchange fee that may be charged in an electronic debit transaction to the “reasonable and proportional” costs related to the transaction.

a. “Reasonable” costs include the actual (minimal) costs of the electronic transaction, but may also include fraud prevention expenses.

b. State and local governments using payment cards for government benefits and banks with less than $10 billion in assets are exempt from the requirement that the Federal Reserve must set their interchange rates. [NOTE: As a practical matter, this “exemption” may not amount to much in the marketplace, but we'll have to wait and see how consumers and retail merchants react to it. One would assume that the lower-cost card (offered by those entities subject to the Fed's rules) would be the maximum charge retailers and merchants will eventually require.]

c. Retailers can offer discounts for using cash, credit card or checks provided they do not discriminate against a particular issuer or network.

d. Retailers may also set minimum transaction amounts of no more than $10 to use a credit card or debit card.

e. There is no requirement in the Report mandating that the retailer pass any savings realized by limits imposed on the interchange fees to the consumer.

6. Federal Reserve Examination Authority: The Fed has been given expanded authority to impose more stringent requirements on both large bank holding companies and “significant” non-banks. This authority includes higher capital and liquidity targets as well as an “estate plan” in the case of insolvency. It now has authority to examine non-bank subsidiaries engaged in activities the subsidiary bank can perform (e.g. mortgage lending) on the same schedule and in the same manner as bank exams. The primary federal bank regulator has backup authority to conduct the exams if the Fed fails to do so. Moreover, the Fed may also obtain copies of reports and supervisory information provided to other banking regulators, independently audited financial statements, information made available by other banking regulators and publicly reported information. [Title 11]

7. Office of Thrift Supervision/Thrift Charter: The thrift charter is retained but the Office of Thrift Supervision is dissolved effective one year after enactment of the legislation (subject to an additional six months extension as may be determined by the Secretary of the Treasury). [Title 3]

a. The regulatory functions over federal savings associations (federal thrifts) are transferred to the Office of Comptroller of the Currency and supervision of savings and loan holding companies (thrift holding companies) and their non-depository subsidiaries is transferred to the Federal Reserve Board.

b. The Federal Reserve Board will also have regulatory authority under the Home Owners' Loan Act for affiliate transactions, limitations on credit extensions to officers, directors and principal shareholders as well as the anti-tying restrictions in existing law.

c. All other regulatory functions over state savings banks (state thrifts) previously held by the Office of Thrift Supervision are transferred to the FDIC.

8. Residential Mortgage Limitations: As a general rule, residential mortgages must have full documentation establishing that the borrower has the ability to repay the mortgage. A safe harbor or “presumption” is created for “qualified mortgage” loans that are fully documented, that comply with specified underwriting criteria, and that demonstrate the borrower's ability to repay. [Title 14]

a. “Qualified mortgages” are exempt from some of the limitations generally imposed on residential mortgages. However, to qualify for the safe harbor, the loan cannot contain negative amortization, balloon payments or prepayment penalties.

b. Yield Spread Premium: The measure prohibits yield spread premiums and other lender incentives.

c. High Costs Loans: The legislation expands the regulation of "high-cost loans.

d. Consumer Disclosures: The measure imposes additional consumer disclosures for mortgages.

e. Office of Housing Counseling: The legislation establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.

f. Penalties: New penalties are created for lender violations. In addition, lender non-compliance with mortgage requirements may be used by the borrower as a defense to foreclosure.

g. Risk Retention: Generally, securitizes and originators are subject to a risk retention requirement for securitized assets of at least 5 percent. The appropriate federal banking regulator (FDIC, OCC and/or Federal Reserve) is charged with developing the regulations to implement this risk standard within 270 days. [Title 9] This risk retention requirement does not apply to residential loans that meet the “qualified mortgage” definition which will be subject to a new standard developed by HUD and the Federal Housing Finance Agency. [Title 14]

9. SEC Oversight and Enforcement: The SEC is authorized to adopt new regulatory controls over broker/dealers and investment advisors who provide personalized investment advice to their retail clients, including the possible imposition of strict fiduciary standards. In addition, the SEC is authorized to prohibit, restrict or authorize the use of pre-dispute mandatory arbitration clauses in security agreements with clients. [Title 9]

a. The SEC may impose civil money penalties in administrative proceedings it conducts against companies found in violations of its statutes or rules.

b. The SEC may impose personal liability for civil money penalties in an administrative proceeding against officers or directors of a company for specified securities law violations.

c. The “Volker Rule” as originally proposed, would have prohibited “banking entities” (i.e., insured depository institutions, their holding companies, subsidiaries and affiliates) from engaging in proprietary trading or holding an ownership interest in or sponsoring a hedge fund or private equity fund. It was modified in its final version to generally permit “banking entities” to engage in proprietary trading of U.S. government securities including specified GSEs and local government securities. [Title 6, Section 619 et seq.]

d. “Bank entities” are also permitted to continue using swaps, such as interest rate swaps and foreign exchange swaps to mitigate risks for specified hedge purposes. However, other types of swap activity, including credit default swaps that are not cleared, must be pushed out to an affiliate.

e. “Bank entities” have a limited ability to provide initial capital and make “de minimus” investments in hedge funds and private equity funds, provided that the aggregate investment does not exceed 3 percent of Tier 1 capital.

f. A study must be conducted by the appropriate banking regulators, the Securities and Exchange Commission and the Commodities Futures Trading Commission within six months of the legislation's enactment to establish the implementing final rules for the “Volker Rule” including rules regarding divesture periods and treatment of illiquid funds.

10. Bank Lending Limits: [Title 6, Section 612]

a. Lending limits for national banks will include any credit exposure, direct or indirect, to a person arising out of a derivative transaction, a repurchase agreement, reverse repo agreement and securities borrowing or lending transactions. State banks may only engage in a derivatives transaction if state lending limit laws take into account the bank's credit exposure to such transactions. The bank must include credit exposures arising from such transactions in its calculation of state lending limits.

b. Insider Loan Restrictions: Limits on loans to insiders are increased to include limits on derivatives, repurchase and reverse repurchase agreements, securities lending and securities borrowing transactions that result in credit exposure for the bank.

11. New Applications/Acquisitions/Interstate Branching [Title 6]

a. Commercial Firms: The FDIC may not approve an application for deposit insurance for an industrial bank, credit card bank or trust bank owned by a commercial firm for a three year period.

b. A three year moratorium is placed on regulatory approval of a change in control exercised by a commercial firm over an industrial bank, credit card bank or trust bank, except under specified conditions including approval of a change in control to prevent default of the industrial bank, credit card bank or trust bank.

c. Restrictions on interstate branching on national banks are removed (Title 6, Section 613.)

12. Executive Compensation/Corporate Governance/SOX Exemption: [Title 9, Section 912

a. Shareholders have the right to conduct a non-binding vote on executive pay and the award of golden parachutes. The SEC has the discretion to require public companies to include shareholder nominees for director.

b. The SEC has the authority to require public companies to include shareholder nominees for directors.

c. Federal financial regulators are given the power to promulgate compensation rules for their supervised institutions and companies.

d. SOX Exemption: Small companies (including banks) under $75 Million in capital are exempt from the requirement to conduct internal controls audits contained in existing securities law. The provision makes permanent an exemption, previously provided by an SEC regulation which had expired earlier this year. [Title 9]

13. Federal Insurance Office: [Title 5] A Federal Insurance Office is created within the Treasury Department. Its purpose is to monitor and evaluate systemic risk in the insurance industry (except health and long-term care insurance). The office will also collect information about the insurance industry, including access to affordable insurance products by minorities, low- and moderate- income persons and underserved communities. The office must conduct a study with recommendations regarding how to modernize and improve the insurance system and report to Congress regarding the study and its recommendations and conclusions.